American investors large and small and many market commentators around the world are having themselves on if they think the Fed’s $600 billion second round of spending and the mooted $US858 billion tax deal, are going to solve the biggest problem in the US at the moment.
That problem isn’t unemployment, or record levels of state and federal debt; it’s the depressed housing sector which is now turning down for the second time in four years.
That wasn’t supposed to happen after the Fed’s first round of spending when it bought $US1.7 trillion of mortgages, and the tax credit for home buyers in the huge stimulus package of 2009.
Both buoyed home prices and demand, but couldn’t stop the relentless tide of foreclosures which has swamped the sector, killing demand and is now again forcing prices lower.
The Fed’s second easing, announced last month did force down home mortgage rates, to record lows in early November, but that is being reversed and last week’s tentative agreement to extend income tax cuts, unemployment benefits and cut payroll taxes for another two years has helped send US market interest rates higher.
In fact the impact of the Fed’s move has been perversely amplified by the market reaction to the tax deal (which now has US analysts and economists tipping much higher economic growth in 2011 and 2012).
Ten year bond yields in the US are up more than 1% and US mortgages (for 30 year fixed rate loans) have crashed past the 5% rate for the first time in months to settle at 5.19% this week.
Normally the rise in mortgage rates past 5% would not be a great problem, yields were at that level earlier in the year, but that’s when the tax credit was inflating demand.
It’s gone and new home starts and sales of existing homes have dropped sharply, despite yields falling to record lows of around 4.17% for the 30 year fixed loan.
A small increase in new starts in November was offset by another fall in permits issued (future home starts).
Starts remain around 1.5 million a year under the debt-powered peak of two million several years ago.
And even if the Fed and the tax deal (which is now in doubt as Democrats in the House of Reps in the US rebel against extending the cuts for the rich) do force higher growth and start unemployment falling next year, that won’t have an impact on housing.
House prices are falling by all measures and now look as though they could drop by 7% to 10% over the next year as the wave of foreclosure sales continues.
This is having a terrible impact on existing mortgage holders. According to a report from the real estate website Zillow: American homes will be worth $US1.7 trillion less in 2010 than they were worth last year.
The website’s economists have calculated that 2010’s drop in home values is 63% bigger than the $US1 trillion dip in 2009, and brings the total value lost since the housing market’s peak in 2006 to a whopping $US9 trillion. (Zillow points out that is more than nine times the cost of the Iraq war so far.)
And more Americans now owe more on their mortgages than their homes are worth: Zillow estimates that in the third quarter 23.2% of single family homeowners with mortgages owed more on their mortgage than their home was worth — up from 21.8% in 2009.
"Despite a strong start to 2010, by the end of the year homes lost more of their value in 2010 than they did in 2009," said Zillow Chief Economist Dr. Stan Humphries.
"Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year.
"It’s a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand.
"Unfortunately, with foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief."
Another property analyst points out that while there was a slowing in the rate of home owners sliding into ‘underwater positions’ on their mortgages, it happened for a not very good reason.
But the drop in properties with negative equity has more to do with troubled borrowers losing their homes to foreclosure than an increase in prices, according to a report from CoreLogic.
It said that about 10.8 million, or 22.5%, of all residential properties with mortgages were in negative equity positions at the end of the third quarter.
That was down from 11 million, or 23%, in the second quarter. The number of underwater borrowers declined by more than 500,000 during the first nine months of 2010, according to CoreLogic.
CoreLogic’s chief economist Mark Fleming wasn’t optimistic about the improvement, saying in a statement:
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